Eurozone: The brutal euro appreciation - ING

There is certainly no reason to panic yet, but the rapid appreciation of the euro exchange rate is making the ECB’s task even more difficult than it already was, especially since some of the euro strength is due to developments in the US, something the ECB can hardly control, according to Peter Vanden Houte, Research Analyst at ING.

Key Quotes

“The ECB isn’t without blame either. When Mario Draghi showed himself more upbeat during the Sintra conference, suggesting that with a strengthening economy a constant monetary policy stance does actually equal a more accommodative monetary policy, markets logically saw this as a tightening announcement. Hence, it was no surprise that the euro exchange rate was pushed higher.”

“As for growth, the stronger euro might have a tempering effect on growth, though for the time being it is certainly not the case yet. In the European Commission’s quarterly survey of the manufacturing industry, businesses’ assessment of the competitive position on markets outside the EU actually improved for the third quarter of this year, now significantly above its long-term average. With domestic demand fueled by upbeat consumers, most economic sentiment indicators continue to hover around the highest level in 10 years. GDP growth came out at 0.6% in 2Q, after 0.5% in 1Q, putting the Eurozone economy on a 2% growth path. The eurocoin indicator, an indicator reflecting the underlying GDP growth pace, stood at 0.63% in July, signaling that the strong momentum continued into the third quarter.”

“We also expect that the ECB will step up its vocal intervention against the strengthening of the euro. One should remember that Draghi’s predecessor, Jean-Claude Trichet, several times tried to stop the euro’s appreciation by stating that brutal currency moves were most unwelcome. But even then, the euro exchange rate might end up being a bit stronger than previously thought, which leads us to believe that the first deposit rate hike might now only come in January 2019.”